A patent troll goes down to Texas

MARSHALL, TEXAS—The slide that defense lawyers showed to the jury read: “This isn’t new.” In a patent case, it could have been a smoking gun—after all, it was written by the inventors themselves. They were describing their business, Nexchange, to a San Francisco conference back in 2000; it was three years before they received their first patent and turned their focus to litigation.

But hours later, inventor Daniel “Del” Ross Jr. was on the stand, and he seemed none too concerned that the crux of his idea was old—if not ancient. He had a patent, twice reviewed by the US Patent Office, and a simple story to tell: “The big difference is, we invented this for the Internet,” he told the jury.

Even though Nexchange failed in the marketplace—and is in fact suing a competitor, Digital River, that survived it—the founders are resolute in their belief that their invention was special.

Nexchange’s idea was to help online retailers get more business by connecting their stores directly to popular content sites like CNN.com; after all, that’s where the users of the still-young Web were hanging out. Their system built e-commerce right into “host” sites like CNN. A merchant could place their product on the host site, and would only have to pay when a sale was made; the host site, in turn, didn't need to worry about losing its readers to another website. It was an early version of online "affiliate marketing," which has become an increasingly common system for online selling—affiliate marketing is expected to be a $4.1 billion industry by 2014.

While affiliate marketing has thrived in e-commerce, the basics really aren’t new, as the Nexchange slide noted. In fact, the 2000 presentation went on to point out that the Nexchange affiliate marketing system wasn’t all that different from putting “McDonald’s in Walmart.” And as company co-founder Ross Jr. would admit to the jury later that morning, the simple idea of going where the customers are is older than Walmart; it dates at least as far back as the first person who repeated the old sales mantra “Location, location, location.”

“If we could do the same thing for the Internet, and put an online store in the right location, we could do a lot of good and sell a lot of products and services,” Ross said on the stand Monday morning. Taking the defense’s argument and running with it, he admitted that putting McDonald’s in Walmart was, in fact, a great idea. “That's kind of what we were doing,” he said. “We were doing it on the Internet, which was new.”

Even that is hotly disputed, though. One of the defendant companies at this trial, Digital River, was embedding online stores on websites back in 1996—a full two years before Nexchange was founded and filed its first patent application. Ross and other plaintiffs’ witnesses say Digital River just couldn’t get the “look and feel” of its client sites down correctly in the way that their system did.

Wielding that argument, and a team of talented lawyers, Ross and his father, Danny Ross Sr., have managed to put most of the online travel industry—which relies heavily on affiliate marketing systems—on the ropes. Once Nexchange failed, the Rosses formed a patent-holding company, DDR Holdings, that bought up the Nexchange patent applications. Once the first patent was issued, they started sending out threatening letters to e-commerce companies. In 2006, they sued nine companies, including big online travel players like Expedia, Travelocity, and Orbitz.

Enlarge/ Patent no. 6,993,572 shows how an online store can be embedded on a website.

The suit was delayed by a lengthy patent reexamination, which DDR underwent voluntarily after defendants brought out their prior art. But the patents survived and were confirmed by the US Patent Office; the key patent in this suit is No. 6,993,572, the second of three issued to DDR.

Now Expedia, Travelocity, and several smaller travel companies have all paid undisclosed settlements for their patents. The final two defendants, Digital River and World Travel Holdings (or WTH), have opted instead to face an East Texas jury trial, now underway in the small town of Marshall.

DDR is demanding a 5.5 percent royalty on the two companies’ affiliate marketing revenue. For Digital River, that’s a bit more than $10 million for the period in question, and it's about $6 million for WTH, a smaller company that specializes in booking cruises online. The numbers aren’t huge by the standards of modern patent warfare, but that doesn’t mean they aren’t burdensome. In the case of WTH, a $6 million verdict would be more than twice the profits it has made in the affiliate marketing business during the entire damages period, which goes from 2006 to mid-2012.

If DDR wins, more lawsuits are likely to follow. The biggest companies on the Internet are involved in affiliate marketing now. And the company is ready to sue outside that market, too; Digital River is an e-commerce company that mostly helps software companies like Microsoft and VMWare run their online stores.

The DDR case shows clearly why, for those who want to battle software patents, it’s a major uphill battle. An unsuccessful company was able to transform itself into a patent company—the kind of company often derided in Silicon Valley as a "patent troll"—and force other companies, even one operating well before it was, to trial.

Nexchange took on heaps of venture capital, growing to about 100 employees, but never turned a profit. Years later, the company’s founders have been able to come back and sue the industry players who did survive, claiming they invented the system first and others came later. Even assuming that’s true—and the claim is hotly contested by the defendants in this case—is it good policy to give a long patent monopoly to one player in a fast-changing field? Especially a player that is no longer even in the market?

86 Reader Comments

The suit was delayed by a lengthy patent reexamination, which DDR underwent voluntarily after defendants brought out their prior art. But the patents survived and were confirmed by the US Patent Office; the key patent in this suit is No. 6,993,572, the second of three issued to DDR.

How?????

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Even that is hotly disputed, though. One of the defendant companies at this trial, Digital River, was embedding online stores on websites back in 1996—a full two years before Nexchange was founded and filed its first patent application.

When obvious prior art like this exists and the patents were still upheld for DDR, there are real problems with the system. Never mind the obvious comparisons to how old this technique is in the physical business world. The Patent Office needs to stop handing out patents for old hat like this simply because it's "for teh Interwebs".

The US is going to really be hurting when we have more patent holders that produce nothing and offer no services than actual product makers and service providers. The lawyers will be rolling in dough though.

The fact that it survived re-examination should be a clear indicator that something at the USPTO isn't working. The question is what the problem is - are the patent examiners that bad, or are they accurately carrying out directives that worked 100 years ago but don't work in the age of digital commerce?Of course, the more important question is what can be done about it, since the people that profit from the broken system are going to fight to keep it that way, so they can keep getting rich at society's expense.

Non-expert witnesses always get asked about their families before any other questioning begins—are they married, do they have children?

How is this legal? Don't questions have to have some actual relevance to the case? What the hell kind of law school did the judges graduate from to even allow this bullshit?

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The trials here move at lightning speed compared to many courts. Judge Rodney Gilstrap, who oversees this trial with a low-key but insistent tone, has limited each side to 14 hours; they’ll have to finish the case by Friday, and may even finish before that.

Ah yes, the hallmark of "justice": limiting each side to a fixed amount of time.

It is pretty obvious the US Patent system needs a good review, and I am sure they know it as well but are stuck between a rock and a hard place: "Should we continue with a broken model that more or less works with some collateral damage, or do we risk changing a core part of innovation and competitive profitability with unknown effects in the long term economy and progress?"

Arstechinca is becoming the site I come to if I want to get depressed. We can complain all we want, but we all know that nothing is going to change because congress is completely broken, and acts in the interest of entrenched interests when it acts at all.

Sigh, where to even begin. How about with the "for the internet" bit. When did the internet become a separate reality that is linked to the real world only when convenient. I need to file a patent for using colors on the internet or maybe reading words on the internet. How did anyone in the patent office let this one through? Twice even! Additionally they admit their competitors did accomplish the concept prior to themselves, but did not get the look and feel portion correct. I fail to see how that even matters from a patent perspective as the concept and the process is what is important even if the result is not perfect.

Also if they are so different as to be distinct, how can you sue them for later on getting their own idea right. Even if the end result coincides, they started first and reached the end result first. Then there are the damages. How can they asked to damages? Just what was damaged? The company went under and was never a success. If their ideas were the same why weren't they competitive?

Sigh...Patents have long since stopped protecting anyone and are now just a vehicle for greed. We are in need of serious reform.

Non-expert witnesses always get asked about their families before any other questioning begins—are they married, do they have children?

How is this legal? Don't questions have to have some actual relevance to the case? What the hell kind of law school did the judges graduate from to even allow this bullshit?

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The trials here move at lightning speed compared to many courts. Judge Rodney Gilstrap, who oversees this trial with a low-key but insistent tone, has limited each side to 14 hours; they’ll have to finish the case by Friday, and may even finish before that.

Ah yes, the hallmark of "justice": limiting each side to a fixed amount of time.

This court is an insult to kangaroos.

Exactly and might I add Does anyone know when the Current Troll Hunting Season Starts ? I just got a Kick-Ass Shotgun and wanted to go out Hunting with my Dog.

Non-expert witnesses always get asked about their families before any other questioning begins—are they married, do they have children?

How is this legal? Don't questions have to have some actual relevance to the case? What the hell kind of law school did the judges graduate from to even allow this bullshit?

They're talking about non-expert witnesses. Expert witnesses have had their credentials verified and are presumed to be an authority on the topic in which they are an expert. Ordinary witnesses, however, must have their credibility established. Such questions do that for the jury. This is a community where such things form the basis for whether a person is reputable or a flake.

I need to take a patent out on "adapting an existing idea or mechanism for use in a networked environment, such as but not limited to a local area network ("LAN") or a collection of publicly-available network ("the internet").".

I imagine, not to distant in the future, a good deal of companies are simply going to stop selling their products in the US.

Sure, the market is big there. But every company has to do a SWAT analysis. If the THREAT of stupid patent litigation becomes so high by non entities that don't actually produce anything of value based on a corrupt system that cannot even hold itself up to its own standards, then the OPPORTUNIES of making any money in the US are negated by the escalating costs of paying lawyers.

Sooner or later, some Asian company is just going to simply ignore the US market completely. Because after all the patent litigation that occur there simply isn't any profit to be made.

Companies are out to make profit, not simply hand it over to lawyers and patent trolls. It simply will come to be that it's just pointless even trying.

The US really needs to get this patent bullshit sorted out, otherwise people just aren't going to want to do business with the US eventually.

Nexchange took on heaps of venture capital, growing to about 100 employees, but never turned a profit. Years later, the company’s founders have been able to come back and sue the industry players who did survive, claiming they invented the system first and others came later. Even assuming that’s true—and the claim is hotly contested by the defendants in this case—is it good policy to give a long patent monopoly to one player in a fast-changing field? Especially a player that is no longer even in the market?

But what if I'm not a patent troll and Apple, Google or Microsoft decide to just start infringing on my patent and put me out of business because of that? Doesn't that get lumped together in this litmus test although clearly wrong and what patents should be used for? So I guess the question becomes if you were put out of business by the patent infringement or just a poor business model.

Oh man, the company I work for is involved into this? That sucks so much.

From what I understand you can have patents that don't respect prior art and common business sense basically because you have changed the medium to which it applies? Something's wrong, it's like getting a McDonald's into a lunar base and be allowed to patent it because it's "on the Moon!"

It makes me want to vomit that a bunch of back water Texan rednecks are deciding the future viability of doing business in the technological world. What the fuck is going on here? How is this allowed to happen? Do they not all realize that if this crap keeps happening companies will just leave America for countries that are not going to allow them to be fucked in this manner? My mind is just stunned. This shit must be stopped now or we will all face serious consequences. Innovation will be stifled and owned by these snake oil sales men and idea thieves. It is just pure insanity.

EDIT: Funny that people are giving me negative votes even though I am correct in my assessment. ROFL. Texans taking this personally? Can't take the idea that Texas is a haven for Patent Trolls and those who support them? I think it is HILARIOUS. In a British black humor sort of way that is.

I also find it amusing that a lot of the more conservative people in America scream and moan about 'Liberal" Judges legislating from the bench all the while conservative judges are doing so much more real damage by passing off cases/judgement's like this train wreck.

I still don't understand what they "invented". TCP is an invention. A shock absorber is an invention. But putting two distinct things together?... is cooking.

Seriously though I took a look at the patent and and then I looked at what conditions must be met for an idea to be patentable and I am shocked. The whole argument seems to be that yes, others were doing the same thing but they didn't "look and feel" right (that is taken from the patent and the article above). I'm not a legal scholar, at all, but it seems to me that they could have patented a specific method of injecting a site into another site. But to claim that they invented the ability to capture the "look and feel" of another website is kind of ridiculous. Unless of course there is only one way to that. Above I said that a shock absorber is patentable. Why isn't there only one type of shock absorber? Probably because there is more than one way to make a shock absorber. As long as the other companies aren't emulating the exact process that the patent holders used, I don't see a problem.

I still don't understand what they "invented". TCP is an invention. A shock absorber is an invention. But putting two distinct things together?... is cooking.

Seriously though I took a look at the patent and and then I looked at what conditions must be met for an idea to be patentable and I am shocked. The whole argument seems to be that yes, others were doing the same thing but they didn't "look and feel" right (that is taken from the patent and the article above). I'm not a legal scholar, at all, but it seems to me that they could have patented a specific method of injecting a site into another site. But to claim that they invented the ability to capture the "look and feel" of another website is kind of ridiculous. Unless of course there is only one way to that. Above I said that a shock absorber is patentable. Why isn't there only one type of shock absorber? Probably because there is more than one way to make a shock absorber. As long as the other companies aren't emulating the exact process that the patent holders used, I don't see a problem.

Hopefully someone will help me out with the link, but I think a recent Ars article touched on the bizarre ruling which watered down the limitations on patenting things which were just recombinations of other inventions.

We're all for small business owners in this country. I speak for them because small businesses are the backbone of the country and are the providers and creators of jobs. /election-year-politix-speak

Now that my brain is hemorrhaging profusely from typing that, who really believes anything will change? There is big money in this nonsense. Politicians couldn't be bothered to change anything or are directly/indirectly paid handsomely to ignore it, and the patent office won't police itself.

I see a whole lot of bitching but I'm not hearing that, just maybe, this or that patent itself has some validity.

In a patent re-examination the party that is paying for it has the option of adding as much "inter partes" information and argument as they want. So how do y'all figure the examiner got bamboozled by the original patent holder, under those circumstances?

Yeah, on the face or it, the invention sounds weak a hell. And I do know plenty of weak patents get approved. I haven't heard of so many weak patents that survive a re-exam challenge.

I see a whole lot of bitching but I'm not hearing that, just maybe, this or that patent itself has some validity.

In a patent re-examination the party that is paying for it has the option of adding as much "inter partes" information and argument as they want. So how do y'all figure the examiner got bamboozled by the original patent holder, under those circumstances?

Most patents have no validity, that's why you aren't hearing they do.

The fact that it went through re-examination and still was rubber-stamped indicates either:

a) there was coercion of some sortb) there was bribery of some sortc) there was abject stupidity at work.

Option C is not out of the realm of possibility, but given how the world works, I'm betting on A or B.

Finally, as others have said, this is another nail in the coffin for America. It won't be long before the ship goes down.

We're all for small business owners in this country. I speak for them because small businesses are the backbone of the country and are the providers and creators of jobs. /election-year-politix-speak

Now that my brain is hemorrhaging profusely from typing that, who really believes anything will change? There is big money in this nonsense. Politicians couldn't be bothered to change anything or are directly/indirectly paid handsomely to ignore it, and the patent office won't police itself.

How will anything change?

It'll change when Chinese tech companies start showing up in Eastern Texas to use their patent portfolios to beat up US companies. One Chinese tech firm already filed more international patents than any other tech company in the world as of the end of 2011.

Unfortunately, as a double whammy, US lawmakers are not opposed to enacting legislation to hamper innovative start-ups right here. Take Tesla as an example (you know, the guys that make those bitchin' electric cars).

Another day, another story of stupid protectionist regulations getting in the way of anyone trying to be innovative. This time, it's about Tesla, the well known electric car company based out here in California. Apparently, various states have set up ridiculous protectionist laws that say it's illegal for automakers to sell cars directly to consumers in retail settings. The various car dealer lobbyists who pushed to get those laws passed are now complaining that Tesla and its high end "stores" violate that law -- despite the fact that you can't actually buy a Tesla car in a Tesla store.

Laws enacted as protectionism for car dealerships. Laws that actually increase the costs of cars for the consumer and make start-ups like Tesla navigate a litigious minefield. Is that really conducive to fostering new small businesses?

Non-expert witnesses always get asked about their families before any other questioning begins—are they married, do they have children?

How is this legal? Don't questions have to have some actual relevance to the case? What the hell kind of law school did the judges graduate from to even allow this bullshit?

Of course it's "legal" - what law would it be violating? It's standard practice at every trial I've ever seen. Keep in mind these are questions being asked by the lawyer calling the witness and are designed to introduce the witness to the jury and establish a human connection between the witness and the jurors. In most situations, it's pretty limited and the judge will curtail it if it gets excessive or becomes irrelevant.

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The trials here move at lightning speed compared to many courts. Judge Rodney Gilstrap, who oversees this trial with a low-key but insistent tone, has limited each side to 14 hours; they’ll have to finish the case by Friday, and may even finish before that.

Ah yes, the hallmark of "justice": limiting each side to a fixed amount of time.

This court is an insult to kangaroos.

Again, this is standard practice everywhere, for lots of reasons. For one, courts have to prioritize criminal matters before civil and there are a LOT of criminal matters. Federal judges can't devote weeks managing a civil trial unless there is a very good reason - if one side or the other had made a compelling argument why they needed more than 14 hours of time to present their case, the judge would have likely let them. Also, federal courts have limited budgets that are funded in large part by us. I certainly don't want to pay the taxes necessary to staff a courthouse that lets civil litigants take as much time as they want, do you?